The Luxury of a Manhattan Pied-à-Terre Just Got a Lot More Expensive

Keeping a place in the city has never been an easy or cheap proposition for out-of-towners, but it has now become a good deal more costly, after state legislators declined to extend a long-standing tax abatement to pied-à-terre owners.

The State Legislature, when it resumed after the New Year, voted to extend the co-op and condo tax abatement—which has been received by nearly all co-op and condo owners—through June 30, 2015.

However, the new extension applies only to primary residences (granted, one can get the abatement on up to three residences in one building, so the law is not completely insensitive to the needs of the well-to-do)—but it is the first time the benefit has been restricted based on residency since it was enacted in 1996.

The abatement came into being as a temporary measure to help correct imbalances in the tax code which put on a heavy onus on owners of co-ops, condos and rental buildings (single-family homes, townhouses and very small condos are taxed at a much, much lower rate). Through a series of extensions (five), the abatement has managed to survive all these years as the most convenient fix for a very inconvenient problem—the need for comprehensive tax reform.

Indeed, the current code transfers the largest share of the tax burden onto rental buildings. Owners pass the cost onto renters, meaning that the people who bear the brunt of the property tax burden (New York City’s largest single source of revenue) are the people who don’t own property, according to a study released last spring by NYU’s Furman Center.

The last tax abatement extension—which granted a sizable 17.5 percent property tax reduction to almost all homeowners regardless of residency—expired on June 30, 2012. The city, assuming that an abatement bill would pass and be applied retroactively, sent out tax bills that reflected the prior reductions. Now some property owners will have to pay more, although the benefit will be phased out for pied-à-terre owners over the next few years, rather than disappearing completely.

“The transition period is potentially going to be very messy,” said Eva Talel, a real estate attorney at Strook & Strook & Lavan. Ms. Talel cautioned that the real headaches of the policy change would be suffered by co-op boards. In the past, given that generally all shareholders qualified for the abatements, boards were able to use the funds for building-wide repairs and capital improvements. Now, with only some of the residents receiving abatements, buildings may lose a source of maintenance income; they will also be left with the question of how to assess taxes and fees.

So will the move discourage pied-à-terre owners, or slow the trophy market madness? Unlikely. While it certainly makes a Manhattan apartment a slightly less lucrative investment, residents of foreign countries were never eligible in the first place—a SSN or EIN was required to take advantage of the abatement. Moreover, keeping a second home in one of the most expensive cities in the world is, in essence, a statement that one has more than enough money to go around.

The good news, and there is some good news, is that co-op and condo owners with properties assessed at or below $60,000 will be getting a bigger tax benefit. Over the next few years, the abatement will increase incrementally from 20 percent to 22.5 percent for residents with properties assessed at $55,001 to $60,000; from 22.5 percent to 25.2 percent for residents with properties assessed between $50,001 and $55,000; and 25 percent to 28.1 percent for residents with properties assessed at $50,000 or less, according to the department of finance.

Under the prior law, the 17.5 percent benefit was given to all applied to buildings with an average assessed value greater than $15,000 per unit; buildings with lesser average values received 25 percent abatements.

Clearly, the move is in part inspired by the city’s desire to increase revenue, as the abatements have cost New York hundreds of millions of dollars. It is also, Ms. Talel opined, a reflection of the city’s desire to privilege full-time residents over its more fair weather friends.

“There is an increasing desire for benefits to go to people who actually contribute to the city, to make sure rewards go to those who live here,” she said, adding that while the extension would come as a relief to many co-op and condo, “we still haven’t solved the underlying problem.”